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International eco: Trade policy in practice Lect 10 part 4 (Trade…
International eco: Trade policy in practice Lect 10 part 4
Trade alleviating effect of market failures
With this market failure,
marginal social benefit
(= additional benefit to society from private production) is not accurately measured by the producer surplus of private firms, so that economic efficiency loss calculations are misleading
When a tariff increases domestic production, the benefit to domestic society can
increase
by increasing the positive side-effects of domestic production (more knowledge spillovers) !
Suppose, externalities to production not taken into account by private firms and investors (e.g. learning, knowledge spillovers)
graph slide 36/60 Trade policies alleviating market failures
Does trade policy really help?
This may indeed work but typically:
Government policies to address market failures are likely to be manipulated by politically powerful groups
By distorting the incentives of producers and consumers, trade policy may have
unintended consequences
that make a situation worse, not better (e.g. discourage investment in other industries)
Unclear when and to what degree a market failure exists in the real world
Market failures: infant industries
Encourage domestic industries, by protecting them from competing imports
Extremely high tariffs (even prohibitively high)
Import quotas
Local content requirements
Only by first protecting own industries, will they ever be able to compete on world-markets (infant industry argument)
Import-substitution policies very popular among many low- and middle income economies before 1980s
Import substitution-effective protection
Import substitution-a success?
Although import-substitution did often “work” in creating large manufacturing industries, and some success stories exist:
It is less clear that they contributed to economic growth:
Countries adopting these strategies grew more slowly than others
Compare many Sub-Saharan African countries to East Asian tigers:
Import substitution: no success
The infant industry argument was not as valid in practice as it could be in theory:
New industries did not become competitive despite, or even because of trade restrictions
Import-substitution industrialization involved costs and promoted wasteful use of resources:
It involved complex, time-consuming regulations.
It set high tariff rates for consumers, including firms that needed to buy imported inputs for their products
It promoted inefficiently small industries
As a result, and (maybe more importantly) because they saw East Asia’s (that didn't adopt these policies, succesful “export-led” growth:
Many developing countries started to liberalize:
graph slide 43/60
It is difficult to say but the evidence points out that increasing exports of developing countries led to growth
Abandoning import-substitution: welfare?
This was also accompanied by increased economic growth in many countries that opened up
However not all
in Latin-America: evidence more mixed
in Africa: evidence seems positive, recent strong growth accompanied by exports
Africa's recent growth + exports : 2010 McKinsey report
in Asia: yes